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The beauty of donor-advised funds

September 23, 2021

They’ve been around since the 1930’s. Now, after the Tax & Jobs Act of 2018, they’re becoming hugely popular again. We’re talking, of course, about donor-advised funds, a unique vehicle that gives you the power to be philanthropic and tax-efficient at the same time.

What exactly is a donor-advised fund?

A donor advised fund is a flexible, easy-to-set-up vehicle for supporting your favorite causes and reaping nice tax benefits. You can contribute stock, cash, real estate, artwork, jewelry, or anything that can be appraised. Most commonly, though, appreciated stock is the best asset to contribute. When you make a gift to your fund, you get a charitable deduction equal to the full fair market value of the gift.

What makes them so wonderful?

There are lots of reasons. Here are just a few:

    • Tax-smart giving

Support causes you believe in. Use appreciated securities to do it. Avoid capital gains taxes. Nice.

    • Ease of set-up

You can generally set up a donor-advised fund in just a few days. Just like that, you’re ready to make charitable donations without the complications of setting up a private foundation.

    • Flexibility

Support any charity, including smaller ones that can’t receive securities or a check as donations. Name your fund almost anything you want.

  • Broader time horizon
    Once money is in your fund, you decide where and when the assets are donated to charities you recommend. Perhaps one of the best features is that while you can take a charitable deduction in the year you contribute to your fund, you don’t need to recommend your full donation be gifted that same year. Again, nice.
  • Strategic “bunching”
  • Your donor-advised fund allows you to take a larger charitable deduction in a year when you might need it, by bunching multiple years of contributions.
  • Anonymity
  • Want to make anonymous donations, so you don’t get targeted for solicitations? Donor-advised funds let you do it.
  • Streamlined record-keeping
  • The custodian of your donor-advised fund — typically Schwab or Fidelity — provides you a year-end recap of all your contributions and recommended donations.

What are some creative ways clients have used donor-advised funds?

Twenty percent of Bridgewater clients currently take advantage of donor-advised funds. Some use their fund to make large charitable gifts that offset income in years their earnings are relatively high — or if they have realized capital gains due to the sale of an appreciated home or other asset in a single year. Others love that they can contribute once and then donate the funds over time, perhaps even setting up a schedule so their gifts provide sustaining support over many months or years. Others have used their donor-advised funds to begin involving their kids in philanthropy. The possibilities are many.

– This is not a solicitation, or an offer to buy or sell any security or investment product, nor does it consider individual investment objectives or financial situations.
– Information in this material is not intended to constitute legal, tax or investment advice. You should consult your legal, tax and financial advisors before making any financial decisions.
– IRS Circular 230 Disclosure: Pursuant to IRS Regulations, neither the information, nor any advice contained in this communication (including any attachments) is intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.